Modify Term of Stock Option Award

[kmhaab]

Can a stock option award be amended to extend the term AFTER the original expiration date? Set aside any ISO/NQSO and accounting issues for now, I'm just trying to determine if it can be done.

Award agreement states that option expires upon the earlier of 10 years from the date of grant, or the expiration date shown on the grant notice.  Grant notice shows a date about 3 months earlier than 10 years from date of grant (related to date vesting begins). 

Example:

- Grant date: 12/31/2007

- Expiration date (as shown in grant notice):  10/1/2017

Can this award be amended to extend the expiration date to 12/31/2017? 

 

[jpod]

Not sure what you are getting at when you say "if it can be done."  If you don't care about the tax or legal ramifications, then sure, it can be done.  That seems rather pointless to me, however.

[kmhaab]

Fair point. I did not mean to suggest I did not care about the tax or legal ramifications, I was trying to get at the threshold question of whether it is even possible to legally amend awards that have expired already.

I am aware there would be an accounting impact to any award modification and that's what I was suggesting be "set aside" for the moment. But happy to hear comments on that as well.

[jpod]

I think whatever direction you are coming at this from, it would be treated as a new option grant, for a very short term, but with the same terms and conditions as the old grant.  If the exercise price is now below the current FMV, we know that (a) it can't be an ISO and (b) the 409A ramifications are terrible.  It may even be impermissible under the terms of the plan authorizing stock options, if the grant is pursuant to a plan.  If I had the time I could go on.

[401 Chaos]

FWIW, the 409A prohibition on extensions for NSOs and disqualifying amendment rules for ISOs would seem to me to make this a nonstarter.  Seems to me the option has expired / terminated based on the clear terms of the grant notice as described above.  From that description, it sounds like there was good reason / clear intent for including the earlier expiration date.  I'm guessing the date just snuck up on the optionee? 

If that is not the case and there is some support or basis for thinking the original terms were intended to have the option expire 12/31 in all cases instead of the earlier date and you can show some clear support (e.g., board resolutions / minutes, etc.), then maybe you have an argument that this was a scriveners' error / typo and the option is still exercisable?  That seems a difficult and thus aggressive argument to make though.

Was this an ISO such that there would be no taxes triggered on the exercise?  If so, hard to replicate that treatment but if this was an NSO (and/or the company wanted to try to provide some similar benefit to the optionee) then maybe you provide them with a restricted stock award now (fully vested) with the right to purchase the same number of shares for a purchase price equal to the option exercise price through December 31st.  That should put the optionee in the same general position as exercising an NSO.  Company could grant the optionee more shares and/or lower the purchase price and/or provide a bonus, etc. to the optionee to help offset immediate taxes if it was an ISO and company feels responsible or sympathetic, etc.. (Without knowing the facts though seems the onus should be on the optionee to know the terms of the award and its expiration date.) 

[Luke Bailey]

I don't understand. The grant date is 3 months after the expiration date. Do you mean the grant date was 12/31/2007? Also, is the FMV higher or lower now than grant date value?

[kmhaab]

Yes, Grant date was 12/31/2007. My apologies for the typo.  FMV is higher now than on the grant date.

But the company is private and valued once per year, so the FMV would be the same on 10/1/2017 and 12/31/2017 (the date they want to extend to).

The expiration date actually snuck up on the company and the grantee. Prior CFO had been notifying employees of upcoming expiration dates, but new CFO has not. And new CFO incorrectly thought expiration date was 10 years from date of grant.

 

[Luke Bailey]

Under Treas. reg. sec. 1.409A-1(b)(5)(v)(C)(1) the spread over the exercise price (I.e., grant date value on December 31, 2007) becomes 409A deferred comp if you extend to a date that is either more than 10 years after date of grant or, if earlier, the latest date when the option could have expired by its terms. The provision contains this sentence: "It is not an extension if the exercise period of a stock right is extended to a date no later than the earlier of the latest date upon which the stock right could have expired by its original terms under any circumstances or the 10th anniversary of the original date of grant of the stock right." Without seeing your plan and agreement, it's hard to say for sure, but I would think that if the option had a hard expiration date of October 1, 2017, that would be the "earlier" date. Also, the regs don't seem to address the revival of an expired option, so I would be leery that that would work also.

[XTitan]

As mentioned by everyone else, 409A effectively prohibits the extension of the option, even when there is an honest administrative oversight (thanks ENRON!).  If the options had been exercised in a timely manner, what would the outcome have been?  Option holders getting shares in the company?  Cash bonus for the difference between FMV and the exercise price?  Can a stock grant or cash bonus get the options holders to the same place as they would have been if the exercise happened?